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Pattern Energy: Offtakers increasingly want equity in projects

Ammonia and hydrogen offtakers are increasingly interested in taking equity stakes as a way of understanding the complex dynamics of the projects they will be offtaking from.

Potential offtakers of ammonia and hydrogen around the world want to take equity stakes in the projects that they will be offtaking from, Erika Taugher of Pattern Energy said last week.

The offtakers – fertilizer and industrial firms, commodities traders, and power conglomerates, mostly in Japan – are seeking to take equity ownership as a means of understanding the novel complexities involved in building first-of-kind projects, said Taugher, a director of green fuels at Pattern.

While initial conversations for offtake for Pattern’s projects involved more standard 10 to 20 year contracts, the negotiations have evolved to include equity stakes.

“All the conversations I’m having with these offtakers – they’re now interested in equity in the project,” she said. “I think that’s interesting to note because there’s so much uncertainty that these offtakers really want to get an inside view on where the money is going, how it’s being spent. They want to collaborate with us on the model. They want to know how many ships we’re sending to Europe a month.”

Pattern, which is owned by CPP Investments, is involved with the Port of Corpus Christi hydrogen hub, and is aiming to bring hydrogen from West Texas to Corpus Christi. The company is planning to export ammonia in the near term until hydrogen transport infrastructure is more mature, Taugher added.

Taugher detailed the main challenges for securing offtake for projects, including pending policy issues, questions about financeability, and logistics.

Pattern and its partners are collaborating with a company that is building a 500-mile pipeline from West Texas to the Gulf, she said. Shared infrastructure with other large players at the Port of Corpus Christi helps to keep costs down.

The company is nearing a deal for offtake, and is openly sharing project information with various potential counterparties, she said, “one of which the exclusivity period ends and we go right into negotiations on the offtake contract before the end of the year.”

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PE firm acquires Innomotics from Siemens AG

A supplier of electric motor and large-drive systems, Innomotics is seeking to capitalize on the megatrends of electrification, energy efficiency, digitalization, and hydrogen commercialization.

KPS Capital Partners, LP has signed a definitive agreement to acquire Innomotics GmbH from Siemens AG for an enterprise value of €3.5 billion.

Completion of the transaction is expected in calendar Q4 2024 or Q1 2025 and is subject to customary closing conditions and approvals, according to a news release.

Innomotics is a leading global supplier of mission-critical electric motor and large drive systems that optimize customers’ processes, uptime, efficiency and profitability. The company manufactures a complete portfolio of low voltage motors, high voltage motors, medium voltage drives and other components, in addition to providing value-added customer services and solutions. The company serves large, highly technical end-markets with its engineering expertise and industry-leading track record of successful projects.

Paul Weiss, Rifkind, Wharton & Garrison LLP and Gleiss Lutz served as legal counsel and Bank of America and Lazard served as financial advisors to KPS. Committed debt financing to support the transaction has been provided by Barclays, Citibank, Goldman Sachs, Intesa Sanpaolo, Morgan Stanley, MUFG Bank, Standard Chartered Bank, UBS and UniCredit.

Innomotics’ products and services are capable of addressing its customers’ most demanding requirements while enabling significant energy savings, decarbonization and sustainability. Headquartered in Nuremberg, Germany, Innomotics generates approximately €3.3 billion in annual revenue, employs approximately 15,000 people and operates 16 factories across the EMEA, Americas and Asia-Pacific regions.

Michael Psaros, Co-Founder and Co-Managing Partner of KPS, said, “The company is well-positioned to capitalize on the global megatrends of electrification, energy efficiency, digitalization, urbanization and the commercialization of new energy resources such as hydrogen. We look forward to working with Innomotics’ senior management and stakeholders to aggressively accelerate the Company’s growth trajectory and value creation opportunities. We thank Siemens for entrusting KPS with its iconic heritage business created by Werner von Siemens. We are proud that the world’s largest industrial companies continue to view KPS as a peer manufacturer and trusted partner.”

Michael Reichle, Chief Executive Officer of Innomotics, said, “KPS, with its demonstrated track record of manufacturing excellence and its global platform, is the ideal owner for the new Innomotics. We will extend our extensive track record of successful technological innovation and providing our customers with world-class products, solutions and services.” Reichle continued, “We look forward to working closely together with KPS and our talented people as we continue to deliver significant value for our customers around the world and enhance Innomotics’ strong technological leadership. Innomotics will continue to benefit from strong growth potential driven by the sustainability-oriented demand for highly efficient electrification and energy consumption in industry and society.”

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SAF developer eschews high-cost debt and equity to pursue DOE loan guarantee

A Colorado-based developer of sustainable aviation fuel projects will forgo high-cost equity and debt financing from the market to pursue a loan from the DOE, delaying completion of a SAF facility by a year.

Gevo, Inc CEO Patrick Gruber said on an earnings call this week that the company, a developer of low carbon fuels and chemicals, will forgo for now the high-cost equity and debt proposals it has received from potential investors for the construction of its first sustainable aviation fuel plant in South Dakota.

Instead, the company will seek a low-interest loan from the DOE – a decision that will delay the in-service date of its first SAF facility, known as Net Zero 1, by about a year, Gruber said.

Net Zero 1, in Lake Preston, South Dakota, is expected to be the first of several SAF projects the company is seeking to build using a modularized construction method, Gruber said. Using corn as feedstock, it would have the capability to produce approximately 60 million gallons per year of liquid hydrocarbons in the form of jet fuel and renewable gasoline. The plant is also expected to produce at least 420,000,000 pounds per year of high-value nutritional products.

The company expects to eventually secure third-party debt and equity investment in its net-zero projects, and to make money through development, fees, licenses, and a “carry” in the project – an equity interest that doesn’t necessarily require a cash investment, according to Gruber.

However, Gruber added that, in the current environment, “interest rates are high and expected to go higher.” After discussions with potential equity investors, Gruber said Gevo believes that the correct approach is to secure the DOE loan guarantee. The DOE process will delay financial close into 2024 and startup of Net Zero 1 to at least 2026, Gruber said.

In late April, Gevo gave notice that its offtake arrangement with Trafigura had been canceled. Gevo last year decided to utilize ethanol fermentation technology instead of isobutanol fermentation technology to produce SAF, requiring an amendment to the Trafigura deal that the parties could not agree to.

“This gives us a little more breathing room,” Gruber commented on the call, noting that airlines would step up for the lost offtake.

Addressing specifically the benefits to Gevo in delaying the Net Zero 1 project to pursue the DOE loan, Gruber noted the company doesn’t need to make orders for long-lead items between now and then.

“It gives us time to get the financing in order, make sure we’ve got everything in order to do the best deal,” he said. “We’ve got to go along with [the DOE] path. It helps with the overall financing.”

Gruber noted during the call that Gevo is looking at existing brownfield sites to build additional SAF plants, at a cost of roughly $400m – $500m depending on existing infrastructure.

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Delta Airlines and DG Fuels sign offtake agreement

Delta Air Lines and DG fuels have signed an offtake agreement for 385 million gallons of sustainable aviation fuel starting in 2026

Delta Air Lines and DG Fuels have signed an offtake agreement through which DG will supply Delta with 385 million gallons of sustainable aviation fuel starting in 2026, according to a news release.

HydrogenPro will supply hydrogen to the DG Fuels plant with the delivery of its high-pressure alkaline electrolyzers.

This commitment from Delta is estimated to make up more than one third of the total volume of the earlier communicated capacity at DG Fuels’ Louisiana facility. The high-pressure alkaline water electrolyzer installation will be at least 839 MW.

“This project will place HydrogenPro as the world’s largest supplier of electrolyzers, and we are now accelerating our presence in the US”,  Richard Espeseth, Interim CEO and Founder of HydrogenPro, said in the news release.

HydrogenPro expects the contract to be signed during 1Q23. The first delivery of electrolyzers is estimated to occur in 2024.

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California renewables developer taps advisor for capital raise

Utility-scale solar and storage developer RAI Energy has tapped an advisor for a capital raise. The company is evaluating co-development conversion for green ammonia production at projects in Arizona and California.

RAI Energy, the utility-scale solar and storage developer, has hired an advisor as it pursues a capital raise.

The company is working with Keybanc Capital Markets in a process to raise up to $25m, according to two sources familiar with the matter.

In an interview, RAI Energy CEO and owner Mohammed S. Alrai said the company “is excited about having [Keybanc] act as our financial advisors on this fundraising round.” He noted that RAI is first a solar-plus-storage developer and is approaching investors as such.

However, RAI is evaluating co-development conversion for green ammonia production at two of its project sites in Arizona and California, he said.

“Hydrogen is a natural next step,” Alrai said of his company, adding that the end-product would be green ammonia for use in fertilizer production and industrial sectors. Pure hydrogen could also be kept for use in transportation.

A variety of partnerships would be required to develop hydrogen at RAI’s solar sites, Alrai said. The company could need advisory services to structure those partnerships.

RAI is working with engineers on the hydrogen question now and is open to additional technology and finance advisory relationships, he said. The company is also evaluating several electrolyzer manufacturers.

“It’s an open book for us right now,” Alrai said of hydrogen production. “We’re always open to talking to people who can help us.”

For hydrogen project development, RAI would seek project level debt and equity similar to its solar developments, Alrai said. Early-stage project sites in Colorado and New Mexico could also be candidates for hydrogen co-development.

Keybanc delined to comment for this story.

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Exclusive: Riverstone Credit spinout preparing $500m fundraise

Breakwall Capital, a new fund put together by former Riverstone Credit fund managers, is preparing to raise $500m to make project loans in decarbonization as well as the traditional energy sector. We spoke to founders Christopher Abbate and Daniel Flannery.

Breakwall Capital is preparing to launch a $500m fundraising effort for a new fund – called Breakwall Energy Credit I – that will focus on investments in decarbonization as well as the traditional energy sector.

The founders of the new fund, Christopher Abbate, Daniel Flannery, and Jamie Brodsky, have spent the last 10 years making oil and gas credit investments at Riverstone Credit, while pivoting in recent years to investments in sustainability and decarbonization.

In addition to bringing in fresh capital, Breakwall will manage funds raised from Dutch trading firm Vitol, for a fund called Valor Upstream Credit Partners; and the partners will help wind down the remaining roughly $1bn of investments held in two Riverstone funds.

Drawing on their experience at Riverstone, Breakwall will continue to make investments through sustainability-linked loans across the energy value chain, but will also invest in the upstream oil and gas sector through Valor and the new Breakwall fund.

“We’re not abandoning the conventional hydrocarbon economy,” Flannery said in an interview. “We’re embracing the energy transition economy and we’re doing it all with the same sort of mindset that everything we do is encouraging our borrowers to be more sustainable.”

In splitting from Riverstone Credit, where they made nearly $6bn of investments, the founders of Breakwall said they have maintained cordial relations, such that Breakwall will seek to tap some of the same LPs that invested in Riverstone. The partners have also lined up a revenue sharing arrangement with Riverstone so that interests are aligned on fund management.

The primary reason for the spinout, according to Abbate, “was really to give both sides more resources to work with: on their side, less headcount relative to AUM, and on our side, more equity capital to reward people with and incent people with and recruit people with, because Riverstone was not a firm that broadly distributed equity to the team.”

Investment thesis

A typical Breakwall loan deal will involve a small or mid-sized energy company that either can’t get a bank loan or can’t get enough of a bank loan to finance a capital-intensive project. Usually, a considerable amount of equity has already been invested to get the project to a certain maturity level, and it needs a bridge to completion.

“We designed our entire investment philosophy around being a transitional credit capital provider to these companies who only needed our cost of capital for a very specific period of time,” Flannery said.

Breakwall provides repayable short-duration bridge-like solutions to these growing energy companies that will eventually take out the loan with a lower cost of capital or an asset sale, or in the case of an upstream business, pay them off with cash flow.

“We’re solving a need that exists because there’s been a flock of capital away from the upstream universe,” he added.

Often, Breakwall loan deals, which come at pricing in the SOFR+ 850bps range, will be taken out by the leveraged loan or high yield market at lower pricing in the SOFR+ 350bps range, once a project comes online, Abbate said. 

Breakwall’s underwriting strategy, as such, evaluates a project’s chances of success and the obstacles to getting built. 

The partners point to a recent loan to publicly listed renewable natural gas producer Clean Energy – a four-year $150m sustainability-linked senior secured term loan – as one of their most successful, where most of the proceeds were used to build RNG facilities. Sustainability-linked loans tie loan economics to key performance indicators (KPIs) aimed at incentivizing cleaner practices.

In fact, in clean fuels, their investment thesis centers on the potential of RNG as a viable solution for sectors like long-haul trucking, where electrification may present challenges. 

“We are big believers in RNG,” Flannery said. “We believe that the combination of the demand and the credit regimes in certain jurisdictions make that a very compelling investment thesis.”

EPIC loan

In another loan deal, the Breakwall partners previously financed the construction of EPIC Midstream’s propane pipeline from Corpus Christi east to Sweeny, Texas.

Originally a $150m project, Riverstone provided $75m of debt, while EPIC committed the remaining capital, with COVID-induced cost overruns leading to a total of $95m of equity provided by the midstream company. 

The only contract the propane project had was a minimum volume commitment with EPIC’s Y-Grade pipeline, because the Y-Grade pipeline, which ran to the Robstown fractionator near Corpus Christi, needed an outlet to the Houston petrochemical market, as there wasn’t enough export demand out of Corpus Christi.

“So critical infrastructure: perfect example of what we do, because if your only credit is Y-Grade, you’re just a derivative to the Y-Grade cost of capital,” Abbate said.

Asked if Breakwall would look at financing the construction of a 500-mile hydrogen pipeline that EPIC is evaluating, Abbate answered affirmatively.

“If those guys called me and said, ‘Hey, we want to build this 500-mile pipeline,’ I’d look at it,” he said. “I have to see what the contracts look like, but that’s exactly what type of project we would like to look at.”

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